CASE 1–3 Two companies competing in the same industry are being evaluated by a bank that can lend money to only one of them. Summary information from the financial statements of the two companies follows:

Datatech Sigma Datatech Sigma Company Company Company Company Data from the current year-end balance sheet: Data from the current year’s income statement:

Assets Sales . . . . . . . . . . . . . . . . . . . . . .$660,000 $780,200 Cash . . . . . . . . . . . . . . . . . . . . . $ 18,500 $ 33,000 Cost of goods sold . . . . . . . . . . . . 485,100 532,500 Accounts receivable, net . . . . . . 36,400 56,400 Interest expense . . . . . . . . . . . . . . 6,900 11,000 Notes receivable (trade) . . . . . . 8,100 6,200 Income tax expense . . . . . . . . . . . 12,800 19,300 Merchandise inventory . . . . . . . 83,440 131,500 Net income . . . . . . . . . . . . . . . . . . 67,770 105,000 Prepaid expenses . . . . . . . . . . . 4,000 5,950 Basic earnings per share . . . . . . . 1.94 2.56 Plant and equipment, net . . . . . 284,000 303,400 Total assets . . . . . . . . . . . . . . . $434,440 $536,450 Datatech Sigma Datatech Sigma Company Company Company Company Beginning-of-year data:
Liabilities and Stockholders’ Equity Accounts receivable, net . . . . . . $ 28,800 $ 53,200 Current liabilities . . . . . . . . . . . . $ 60,340 $ 92,300 Notes receivable (trade) . . . . . . . 0 0 Long-term notes payable . . . . . . 79,800 100,000 Merchandise inventory . . . . . . . . 54,600 106,400 Common stock, $5 par value . . . 175,000 205,000 Total assets . . . . . . . . . . . . . . . . 388,000 372,500 Retained earnings . . . . . . . . . . . 119,300 139,150 Common stock, $5 par value . . . 175,000 205,000 Total liabilities and equity . . . . . $434,440 $536,450 Retained earnings . . . . . . . . . . . 94,300 90,600 Required:

a. Compute the current ratio, acid-test ratio, accounts (including notes) receivable turnover, inventory turnover, days’ sales in inventory, and days’ sales in receivables for both companies. Identify the company that you consider to be the better short-term credit risk and explain why.

b. Compute the net profit margin, total asset turnover, return on total assets, and return on common stockholders’
equity for both companies. Assuming that each company paid cash dividends of $1.50 per share and each company’s stock can be purchased at $25 per share, compute their price-earnings ratios and dividend yields.
Identify which company’s stock you would recommend as the better investment and explain why.